How is the Premium for Life Insurance Calculated?

Life insurance premium is influenced by numerous factors. It is highly dependent on the chosen plans and the applicant’s details such as age, health, gender, occupation, financial ability, debts, and dependents and so on. Premiums differ with insurers. Occasionally the premium you pay is different than what is calculated by the premium calculator as the calculations may change with these factors. Thus, understanding what goes in to calculating a premium is vital to make an informed decision. Let’s take a look.

How is Life insurance premium calculated?

Insurance companies employ their underwriting department to calculate premiums. With the help of statistics and mathematical calculations that take in to account the applicant’s medical history, age, etc. they ascertain the premium amount. This information is further analysed by statisticians hired by insurance companies called ‘actuaries’ who predict the likelihood of a claim. From the data collected, they use a mortality and sickness table that assign a probability to and predict the likelihood of the applicant dying or getting an illness based on age and gender. A higher probability of claim attracts higher premium charges. Based on the results of this analysis, the premium is calculated.

Let’s look at some of the pivotal determining factors:

Age – Age and insurance premium have a direct correlation. The amount you would pay towards premium increases as you age, which is why it’s a good idea to buy insurance early on. Also, younger people are less susceptible to age-related diseases and thus the likelihood of a claim arising is less.

Gender – On an average, women live longer, hence they would have to pay more number of premiums. Women are also more likely to get diagnosed with illness earlier. Therefore, the premium calculated for them might be lower than what men might be required to pay.

Physical attributes – Height and weight of the insurance buyer is also a factor considered by companies while calculating premium. As overweight people are more prone to weight-related disorders, they may attract more premium than healthier people.

Medical history – Not just your current health status, but your medical history is also an important factor that affects how your premium is calculated. Any past illnesses, the likelihood of them returning and the severity of its impact are contributing factors to premium calculation. Insurers also look at your family’s health history and if you’re prone to contracting hereditary diseases like diabetes or heart related issues, etc.

Drinking and smoking – If you smoke or drink regularly, you’re more vulnerable to health problems associated with such habits. Insurers factor in such habits while computing your premium.

Profession – If you’re in a profession that poses a certain amount of risk to your life there is a greater chance for a claim. For instance: Premiums for pilots are higher than sedentary professionals.

Marital status – While deciding the premium, insurers also look at your marital status. In case of joint insurance policies for couples, payout can only be given at the time of death of the first spouse.

Income and debts – Your current income and debt play important roles in determining your premium. Insurers assess your financial standing while calculating premium to know if you will be able to afford it.

Policy tenure and death benefit – The length of your policy is also a basic determinant of your premium. Since longer tenure policies give a higher death benefit, they attract higher premiums compared to shorter duration policies. This also explains why a life insurance policy that covers you until death involves a higher premium compared to a term insurance policy which covers only a limited number of years.

Mode of premium payment – Insurance companies give you the option to pay premium either monthly, quarterly, semi-annually or annually. However, frequently paid premiums are usually more expensive due to additional operating costs incurred by insurance companies in processing them. Thus, cost of your premium depends upon the frequency with which you pay the premium.

Decreasing payouts – Insurance premium is also calculated based on the quantum of protection. If you choose a policy where the protection decreases year after year, the premium will be calculated differently than if you had a policy that provided a fixed cover for its entire duration.

Conclusion

Researching and analyaing all available policy options is important before selecting an insurance policy that covers all your needs. Understanding how policy premium is calculated will help you do an effective cost-benefit analysis of the policy and enable you to exercise prudent judgement while purchasing one that gives you optimum coverage at minimum cost.

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Additional Disclaimers

THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER. THE LINKED INSURANCE PRODUCTS DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICYHOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.

For more details on risk factors, terms & conditions please read sales brochures and benefits illustrations carefully before concluding a sale. Products and as such, are subject to risk factors • The premium paid in unit linked life insurance policies are subject to investment risks associated with capital markets and the NAV’s of the units may go up or down based on the performance of fund and factors influencing the capital market and the policy holder is responsible for his/ her decisions • Aegon Life Insurance is only the name of the Insurance Company. Aegon Life iMaximize Insurance Plan and Aegon Life iInvest Insurance Plan is only the name of the unit linked life insurance contract. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. The non-guaranteed projected investment returns of 4% and 8% are not guaranteed. Please know the associated risks and the applicable charges, from your insurance Agent or the Intermediary or policy document of the insurer .If death occurs due to suicide within 12 months from the date of commencement of risk or of the Policy, the death benefit is refund of at least 80% of the premium(s) paid provided the Policy is in-force. If death occurs due to suicide within 12 months from the date of revival of the Policy, the death benefit is higher of 80% of the premiums paid till the date of death or the Surrender Value available as on the date of death. If death occurs due to suicide within 12 months from the date of exercising life stage option (resulting in the increase in death benefit), the death benefit is the aggregate of the following: Original Total Sum Assured, plus any increased Sum Assured purchased by exercising the life stage option prior to 12 months from the date of death (due to suicide); plus 80% of the premiums paid for the last increase in Sum Assured. The premiums paid and benefits received are eligible for tax benefits under section 80C and 10 (10D) of the Income Tax Act of 1961, respectively on fulfilment of conditions laid down for availing such benefits. Please consult your tax advisor for details. Goods & Services Tax announced by Government or statutory body in future would be levied as per the applicable laws.